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August 17, 2006

Tobacco firms lose US ruling but escape damage

by Sam Savage

By Peter Kaplan

WASHINGTON (Reuters) - Cigarette makers escaped major
financial penalties on Thursday, even though a federal judge
found them liable for violating racketeering laws in a
decades-long conspiracy to hide the dangers of smoking.

U.S. District Judge Gladys Kessler ruled that the group of
tobacco companies had broken the law, but could not be forced
to fund a multi-billion-dollar quit-smoking campaign, as the
government had sought.

"Cigarette smoking causes disease, suffering, and death.
Despite internal recognition of this fact, defendants have
publicly denied, distorted, and minimized the hazards of
smoking for decades," she said in the 1,653-page opinion.

Kessler said the companies suppressed research, destroyed
documents and manipulated nicotine levels to perpetuate
addiction, but an appeals court ruling prevented her from
slapping the companies with costly remedies.

She did impose some remedies, including ordering the
companies to make "corrective" public statements about the
health effects and addictiveness of smoking, and banning them
from describing cigarettes in ways that convey health claims
such as "low tar" and "light."

Targeted in the 1999 lawsuit were Altria Group Inc. and its
Philip Morris USA unit; Loews Corp.'s Lorillard Tobacco unit,
which has a tracking stock, Carolina Group; Vector Group Ltd.'s
Liggett Group; Reynolds American Inc.'s R.J. Reynolds Tobacco
unit and British American Tobacco Plc unit British American
Tobacco Investments Ltd.

As public health groups expressed disappointment in the
outcome, tobacco stocks rose. Altria gained over 3 percent in
extended trading, Reynolds rose over 2 percent, Carolina Group
was up over 1 percent.

"Although they lost, they won. It's a victory for the
tobacco companies," said Tim Ghriskey, chief investment officer
at Solaris Asset Management.

A spokesman for Reynolds Tobacco said the company was
disappointed that Kessler ruled in favor of the government but
"certainly we're pleased that the court did not award
unjustified and extraordinary expensive monetary penalties..."

The ruling was also seen as the last major hurdle to be
cleared before Altria decides when it will spin off its Kraft
Foods Inc. business.

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Kessler ordered each company to post on its Web site all
documents it submitted to prosecutors in the case and
transcripts of letters and depositions of former employees
about the health impacts of cigarette smoking or research. The
material must remain on their Web sites until 2016.

The corrective statements would have to appear on Web
sites, in full-page advertisements in major newspapers, on
three major television networks, and on cigarette packaging.

She also ruled that the tobacco companies will have to pay
for the government's court costs. Current figures are not
available, but the government has previously said it spent more
than $130 million on the case.

Kessler said sale of a cigarette brand or business to an
outside entity can only occur with her permission.

The companies pursued profits "with little, if any, regard
for individual illness and suffering, soaring health costs, or
the integrity of the legal system," Kessler said.

But Kessler exempted Liggett from the remedies, saying the
company "does not have a reasonable likelihood of future
(racketeering) violations" because it withdrew from the
conspiracy in the mid 1990s.

The judge said she was barred from imposing stricter
penalties by a February 2005 ruling of the U.S. Court of
Appeals for the District of Columbia Circuit.

That opinion, written by U.S. Appeals Court Judge David
Sentelle, barred the government from seeking $280 billion in
past industry profits, depriving the government of its biggest
potential weapon in the case.

Lawyers for the Justice Department eventually asked the
judge to instead require tobacco companies to fund a 10-year,
$14 billion anti-smoking program if the government prevailed.

But in Thursday's opinion, Kessler said that remedy was
also out of step with the appeals court ruling, which dictated
that civil racketeering remedies focus on the prevention of
future misconduct, not punishment of past misdeeds.

Public health groups applauded Kessler for holding the
tobacco companies liable but expressed disappointment in the
remedies.

"It's... worthy of a life sentence but instead they got a
slap on the wrist," Cass Wheeler, the chief executive of the
American Heart Association, said in a statement.

The Justice Department applauded Kessler's finding of
liability, and while disappointed with the remedies, was
hopeful they could have "a significant, positive impact on the
health of the American public."